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Opportunity to claim refunds in France - the European Court of Justice found that the French tax treatment of foreign dividends is not consistent with the freedom of establishment principle

Under French tax provisions, dividends received by a resident parent company, whether received from a resident subsidiary or not, are deducted from the net profits of the parent company, excluding a 5% proportion for costs and expense which is then subject to CIT and additional surtaxes. However, the taxation of this 5% proportion for costs and expenses by the parent company is neutralized for the dividends distributed by subsidiaries belonging to its tax-integrated group (so called “intégration fiscale”). As foreign subsidiaries cannot benefit from the tax-integrated group regime, there are thus excluded from the benefit of the neutralization of the 5% proportion for costs and expenses.

Being asked by a French holding company for the refund of the CIT and additional surtaxes corresponding to the 5% proportion for costs and expenses on dividends received from a foreign subsidiary because it would be not compliant with EU law, the administrative Court of appeal of Versailles has finally referred a request for preliminary ruling to the European Court of justice (“ECJ”) on this particular point.

By a judgment dated September 2, 2015 (C-386/14), the ECJ found that EU law “must be interpreted as precluding rules of a Member State that govern a tax integration regime under which a tax-integrated parent company is entitled to neutralisation as regards the add-back of a proportion of costs and expenses, fixed at 5% of the net amount of the dividends received by it from tax-integrated resident companies, when such neutralisation is refused to it under those rules as regards the dividends distributed to it from subsidiaries located in another Member State, which, had they been resident, would have been eligible in practice, if they so elected”. With this decision, the ECJ followed the Advocate General Kokott’s opinion issued on June 11, 2015, in which she concluded that this difference of tax treatment between resident or foreign subsidiaries was constitutive of a restriction to the freedom of establishment principle that was not justified.

Based on this ECJ judgment, the administrative Court of appeal of Versailles should logically refund the taxpayer with the claimed CIT and additional surtaxes, corresponding to the 5% proportion for costs and expenses on dividends received from foreign subsidiaries.

Thus, in practice, French holding companies may claim refunds with respect to dividends received from subsidiaries established outside of France, which, had they been resident, would have been eligible to the tax integration regime (i.e. subsidiaries owned at least 95% continuously during the year directly by the parent company or through group companies).